Wednesday 4 June 2014 11.12 EDT
First published on Wednesday 4 June 2014 11.12 EDT

Employers will be given the option to join Dutch-style pension schemes as part of the government's latest plans to turn around a long-term decline in saving for retirement.

Ministers said they would support collective industry-wide pension schemes, like those which are popular in the Netherlands, and more flexible employer-based schemes. The stated aim is to boost the retirement pots of millions of workers.

The pensions bill will also contain reforms, first outlined by the chancellor, George Osborne, which banish the restrictions that previously forced pensioners to use their savings to buy an annuity.

In March, as he scraped compulsory annuities – a change starting from next April – Osborne said in his budget speech that pensioners had waited too long to take control of their savings in retirement.

Speaking to the BBC, the culture secretary, Sajid Javid, said the plan addressed the long-standing complaint that annuities represented a poor deal for many pensioners. "If they have been sensible enough to save for the long-term, we should trust them to be sensible with their money when they retire."

Labour said it would back the bill, which comes just months after alterations to the state pension hit the statute book, and the TUC welcomed the government's backing for industry-wide retirement savings schemes.

Industry bodies also cheered the move to ecourage lower cost pension-saving vehicles which can generate bigger pension pots for staff without imposing extra charges on employers.

Over the last 10 years the number of people contributing to pension funds has dropped dramatically. Fewer people make contributions, and those that do make smaller monthly payments.

Additionally, employers have switched from final salary schemes, which commonly guaranteed an income worth two-thirds of a worker's last pay cheque, to cheaper defined contribution (DC) schemes.

The high running costs imposed by pension providers, coupled with a sharp decline in annuity rates, have proved a strong disincentive to saving, even when employers make a contribution.

Under the new plans, the bill will end restrictions on how people withdraw money from their pensions.

Previously, people could take 25% of their pension pot as a lump sum, tax free, at the age of 55, but they were forced to pay 55% tax on any further cash withdrawals. Under the new rules the 55% rate is abolished and a saver will only pay a marginal rate of income tax on sums above the tax-free allowance.

The Dutch-style collective defined contribution (CDC) pension funds, which have been considered by previous administrations and rejected as excessively corporatist, will get the backing of HMRC and qualify for tax breaks afforded other types of schemes.

Under this scheme, savings are pooled by the fund's trustees and workers get a "target" retirement income; trustees of the scheme decide how much workers should receive as an income when they retire.

Shortfalls in the Dutch schemes in recent years have led trustees to implement cuts. Nevertheless, a study of CDCs between 1955 and 2011, by the consultants Aon Hewitt, found that those retiring on the average DC scheme received 21% of their previous salaries compared to those on a CDC scheme who received 28% of their salary.

However the study did show that Dutch workers saved more into their schemes and that CDCs failed to provide superior returns every year. (Between 1994 and 2004, the UK's reliance on stock market returns meant that the CDCs did do better.)

Crtics of the pension "freedoms" point to the experience in Australia, where retired workers can already access their savings without suffering penal tax rates. Thousands of workers take advantage of the scheme.

Experts also question whether workers will make bad decisions when they gain access to their pension savings. The bill will provide up to £20m for an advice service, though it is not clear where the government will find an army of experienced and well-trained financial experts to provide advice to savers once the new scheme is up and running.

The Low Incomes Tax Reform Group, a spin-off from the Institute of Taxation, said the funds put aside to provide advice were inadequate. The Treasury's £20m cap on funds for the guidance service allows about £30 for each eligible retiree. About half of the 650,000 people who retire each year have savings.

Malcolm Booth, chief executive of the National Federation of Occupational Pensioners, said CDC schemes "could bring significant benefits, both reducing the costs and the risks of pensions for future pensioners", but cautioned that "the vast number of changes to both the state and occupational pensions" were already "causing confusion and uncertainty".

The government has recently established a flat-rate state pension (abolishing means testing and the earnings-related top-up pension plan), alongside the creation of Nest, the national occupational scheme designed for smaller employers.

Tim Thomas, head of employment policy at the Engineering Employers Federation, said: "Collective DC schemes can provide better pensions, but their members need to know what they are signing up for – that targets for incomes in retirement are not the same as guarantees and that collective schemes do not provide a defined benefit."